Marlboro Man Dons Lab Coat to Find Next Big Tobacco Hit

An artist's rendering of an e-cigarette, resembling a hollowed-out fountain pen, designed by Philip Morris International Inc. Source: Philip Morris International Inc via Bloomberg

Oct. 9 (Bloomberg) -- Not all cigarette butts are trash.

At a Philip Morris International Inc. lab on a Swiss lake,
researcher Bertrand Bonvin insists the butts of the Marlboro
maker’s next-generation tobacco products be burned after
testing, lest the proprietary technology in them sneak out.

Despite the growing popularity of e-cigarettes, Bonvin and
his peers at the biggest tobacco companies are still looking for
their holy grail -- a product that will hook nicotine-craving
smokers like conventional cigarettes, without the health
downfalls. Such an item could reignite stocks in the $760
billion industry, which have stagnated over the past 12 months
amid falling sales and increased restrictions on smoking.

“The problem with cigarettes is the way nicotine is
delivered, and all the by-products of burning tobacco,” said
Bonvin, the New York-based company’s head of research. “There
is a space for e-cigarettes, but there are concerns about
quality and the lack of regulation.”

Battery powered e-cigarettes deliver vaporized nicotine and
light up when puffed; the process is called “vaping.” The
newer devices that Bonvin is working on are the result of years
of research in labs like PMI’s facility, and show how far
tobacco technology has come since previous attempts at so-called
“harm-reduction” devices flopped.

Cigarette Mimics

PMI, the world’s largest publicly traded tobacco company,
is putting tobacco in its new product to satisfy smokers’
cravings for the taste of a conventional cigarette like the
Marlboro man cowboy used to smoke.

The device Bonvin puffs in the lab looks like a hollowed-out fountain pen. A custom-built cigarette is inserted and its
tobacco is heated to generate a smoking aerosol. The temperature
is “significantly below” what’s generated by a traditional
cigarette, which burns tobacco, PMI has said.

While that lessens the health risk, Bonvin says the device
still “needs to mimic as closely as possible a cigarette, both
in taste, nicotine delivery and behavioral experience.”

Competitors are taking other routes. British American
Tobacco Plc, Europe’s biggest player, is using an aerosol
technology found in asthma inhalers. Both companies say their
products aren’t intended to help smokers quit; rather, they
promise to deliver a safer, more satisfying experience than the
current crop of e-cigarettes.

Nicotine Delivery

“Our observation is that while many smokers try e-cigarettes they don’t necessarily stick with them,” said Paul
Triniman, chief executive officer at Kind Consumer, a London-based company backed by former Tesco Plc CEO Terry Leahy that
has licensed its product to Nicoventures, a unit of BAT. “E-cigarettes are not particularly effective at delivering
nicotine.”

And they haven’t yet given tobacco stocks a jolt. After
rising nearly fourfold between 2002 and 2012, the MSCI World
Tobacco index has risen about 0.6 percent over past 12 months,
compared with a 16 percent gain for the MSCI World Index. BAT
fell 0.2 percent to 3,205 pence at the close in London, while
PMI was down 1.3 percent at $84.80 at 11:47 a.m. in New York.

While e-cigarettes have taken the market by storm -- global
sales will approach $2 billion this year and top $10 billion by
2017, according to Wells Fargo & Co. -- their unregulated status
has allowed entrepreneurs to buy them cheaply from China and
resell them to create a “Wild West” environment, according to
Exane BNP Paribas analyst James Bushnell.

Vype, Voke

E-cigarettes are the “biggest potential threat and
opportunity the industry has had for a long time,” he says.
“The only thing that’s fundamentally changed in cigarettes
since the 1960s is that they put a filter in.”

While both companies are also investing in e-cigarettes --
BAT has introduced its own e-cigarette brand, called Vype, and
PMI has two other technologies in earlier stages of development
-- they want to move beyond that technology with their devices.

BAT’s other product, dubbed Voke and presented to investors
in early September, promises to deliver cold aerosolized
nicotine via a patented breath-operated valve nearly as fast as
the six to 12 seconds it takes for a conventional cigarette.

The device comes in two parts, housed in a case that looks
like a cigarette pack. Users dip a cigarette-shaped stick into
an aerosol canister to load it up with nicotine and they are
ready to puff. Its creator is Alex Hearn, an asthmatic Oxford
graduate and former smoker who first started work on it in 2001
and has gone through over 800 prototypes. Voke is currently
awaiting a license from U.K. health regulators and would go on
sale in Britain next year, pending approval.

New Regulations

In the U.K. -- unlike the U.S. -- devices like Voke will be
regulated as medicines from 2016, which will require
manufacturers to present data on the quality of their products,
how they deliver nicotine to the body and how they compare with
nicotine-replacement products like patches and gums. The
European Parliament yesterday rejected a similar proposal,
opting instead to apply rules on general product safety.

Faulty e-cigarettes have been known to explode, causing
second-degree face burns, U.K. health regulators said in June,
and policy makers from Washington to Brussels are now trying to
assess and standardize their safety. The clampdown will force
many e-cigarette companies out of business as they lack the
resources to abide by the new rules, leaving the market to the
big tobacco companies, according to Iwona Mamczur, an analyst at
research company Mintel.

Reduced Risk

Decades of domination has left them with deep pockets to
finance research. PMI last year alone spent $250 million on
developing reduced risk products, and will shell out as much as
$810 million to build one or two factories to produce them. The
company currently has three systems in development, the first of
which could debut as early as 2016, depending on the completion
of clinical trials.

Investors don’t want a repeat of famous flops like Premier,
a heated-tobacco cigarette unveiled in 1988. Its maker, now
called Reynolds American Inc., dropped it within a year amid
widespread complaints about its taste and aroma. PMI’s Heatbar
product, based on a similar method, was scrapped about five
years ago as consumers found it too bulky.

Tobacco makers have learned those lessons, says Berenberg
Bank analyst Erik Bloomquist. While it’s too early to say which
next-generation device will win, he says, “I don’t think the
incumbents will be unseated.”